- Risk aversion hits global markets on Tuesday
- Yen lingers near lowest level since 1986
- US PCE in sharp focus as inflation fears mount
- Gold pressured by hawkish Fed
A wave of risk aversion engulfed equity markets on Tuesday as investors rotated out of this year’s top-performing tech companies.
Asian shares declined, tracking the overnight selloff in US tech stocks, while European markets pointed to a negative open along with US equities. Investors seem to be on the defense amid tech concerns and a sense of uncertainty about US-Iran peace talks despite the “encouraging progress”.
US and Iranian negotiators agreed on a 60-day roadmap in Switzerland for a final deal. Nevertheless, there is a growing sense of market fatigue amid the constant cycle of hope, breakthroughs, complications and delay. Markets may remain fragile and highly reactive to geopolitics until a deal is truly secured.
In the FX space, the Yen lingered near its lowest level since 1986. Traders remain on high alert for intervention after a call between Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent. Should an intervention become reality, this could result in monstrous levels of volatility on the USDJPY as seen in the past when the Japanese government intervened. USDJPY is trading around 161.70 as of writing.
It's a big week for US data, and the headline act is the PCE report - the Fed's preferred inflation gauge. US inflation is expected to hit 4.1% in May, driven largely by the oil shock from the Iran conflict. Core PCE is forecast to tick up to around 3.4%–3.5%. Markets are already pricing in roughly a 32% chance of a Fed hike by July.
Gold slipped as inflationary concerns eclipsed initial optimism over progress to end the Iran war.
Encouraging progress in peace talks may have cleared a layer of uncertainty with hopes of the Strait of Hormuz re-opening initially offering a tailwind for gold as the dollar weakened. Nevertheless, sentiment remains fragile with any signs of complications or further delays shifting the market mood.
A major obstacle for gold may be the Fed following Kevin Warsh's hawkish debut. With inflationary pressures still a key theme, the central bank is expected to raise rates possibly twice in 2026. So, there may be extra attention to the PCE report on Thursday which may impact the dollar and Fed rate expectations.